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EU holiday pay ruling: How employers can mitigate risk

In a recent landmark decision, the Court of Justice of the European Union (CJEU) ruled that workers should be paid commission while on leave as part of their holiday pay. Lawyer Zoe Bedford explores the implications and how employers can react.

This will apply where a worker’s remuneration is made up of a fixed amount (basic salary) and a regular variable amount that is ‘intrinsically linked’ to his or her role, such as sales-related commission.

The Lock vs British Gas case

The CJEU agreed that the commision Lock earns is intrinsically linked to his role as a salesman. Accordingly, his holiday pay should include an amount equal to the average level of commission he would ordinarily have earned had he been working during his holiday period.  

Employment tribunal judges, and therefore UK employers, are now bound to follow the CJEU’s decision.

For sectors where the payment of sales commission is the norm, the implications are huge. Businesses are now faced not only with the higher cost of holiday pay going forward, but also the risk of potentially substantial claims for historical under-payment of holiday pay.

Such claims could potentially go back to 1998 or, if later, when employment began for the worker making the claim. As a crumb of comfort for employers, it seems the CJEU decision only applies to the 20 day annual leave entitlement under the WTD rather than the full 28 day entitlement in UK law under the WTR.

In addition, any claim for backdated holiday pay must be made to a tribunal within three months of the last underpayment. Therefore, workers who were last underpaid more than three months ago, and who have not yet presented a claim, will already be out of time. 

The biggest headaches for employers caused by the Lock decision are how to calculate the amount of commission and how to prevent abuse by workers in the timing of their holidays. Where sales are affected by seasonal trends, workers would be better off taking their holiday after a busy period, if the amount of commission in their holiday pay was based on average earnings over the previous 12 weeks. 

Next steps for employers

Given all the implications of this decision, prudent employers will now take some or all of the following steps: 

  • Review their current commission structures and related documentation;
  • Investigate whether their existing payroll systems are capable of calculating average historical commission payments or entitlements so as to allow them to take role-related commission into account when calculating future holiday pay; and
  • Prepare a strategy for minimising their exposure to claims and put a value on that exposure.   

One way employers may react to the CJEU’s decision could be to reduce the rate of commission they pay their workers so as to take into account the additional amount which will now need to be paid to them in the form of holiday pay.

This would mean that overall the same amount of commission is paid, as is currently paid. Such a response would be lawful provided that the employer is contractually at liberty to adopt that approach.

Zoe Bedford is a solicitor specialising in human resources and employment law with Turbervilles Solicitors